Who is really driving the cotton price surge?
On July 20, Beijing was hit by torrential rain, and almost all flights from Hubei to Beijing were cancelled. Sun Ying'an, chairman and general manager of Hubei Xiaomian Industrial Group Co., Ltd., still switched to the high-speed rail and rushed to Beijing. Joining him in braving the rain to attend the symposium of cotton textile enterprises in Beijing were the heads of more than 150 textile enterprises from across the country.
"The cotton price has really gone crazy. If we don't work out a solution, we simply won't survive," this became the opening line that the bosses all said in unison.
The delayed release of state reserve cotton, the soaring price of state reserve cotton, and the "miscellaneous fees everywhere" when withdrawing state reserve cotton... State reserve cotton became the late-summer "pain point" of the textile industry. On one side, the national treasury reserve is piling up; on the other, cotton prices are soaring and textile enterprises have no cotton to spin. Where exactly did things go wrong?
"Cotton palm" deals a heavy blow to the textile industry
Three months after the release of state reserve cotton, prices rose by as much as 30%, and enterprises' psychological price levels were repeatedly broken through
In early spring this year, news that state reserve cotton would be released to the market in April spread among textile enterprises, and controlling cotton inventories to reduce costs became a unanimous decision among enterprises. However, what caught enterprises off guard was that the announcement on releasing state reserve cotton was not issued until April 15, and the release date was also changed to May.
"We started controlling cotton inventories in March, but unexpectedly the state did not release any at all in April. To keep our orders, we had to go to the market and buy high-priced cotton," Sun Ying'an said.
The postponement of the release of state reserve cotton instantly made cotton a hot commodity, and cotton prices immediately began to soar. Taking ** cotton enterprises as an example, in March and April, the inversion between costs and selling prices for cotton enterprises within Xinjiang expanded from 200 yuan-300 yuan/ton to 1,200 yuan-1,500 yuan/ton, and enterprises suddenly felt panic.
Textile enterprises that thought they would get a breather after holding out for a month soon discovered that after the release of state reserve cotton, cotton prices not only failed to stabilise but became even more frenzied. Since the reserve release began on May 3, the transaction rate for state reserve cotton out of storage exceeded 98%, and prices also climbed from 12,428 yuan/ton to the highest transaction price of 16,350 yuan/ton on July 28, an increase of more than 30%. The high price of state reserve cotton in turn drove continuous increases in spot ginned cotton, with ginned cotton quotations also rising from about 11,000 yuan/ton in early April to about 15,000 yuan/ton, a cumulative increase of about 35%.
"In February and March, our delivered purchase price for cotton was 12,300 yuan/ton, and we even communicated with people, saying, 'The reserve release is coming, don't ship any more.' But the reserve release kept being delayed, and later the price of state reserve cotton began to soar all the way," revealed Wu Mingfeng, general manager of Sunvim Group Co., Ltd. The frequency of the company's meetings on cotton procurement was shortened from once every 10 days to once every 3 days. "At the meetings, what everyone said most was 'It's gone crazy again.' Prices rose so much that we simply didn't know where to start."
Di Hui, deputy general manager of China Resources Textiles Group, also admitted that because the state was going to release reserves for auction, the company had deliberately controlled inventory and the pace of cotton purchases earlier, but unexpectedly now it could only buy high-priced cotton. "Orders from export enterprises were all signed at the end of last year, and order prices will not change, but cotton prices cannot be caught up with no matter how hard you chase them. Psychological price levels were broken through again and again."
What enterprises found even more unexpected was that cotton was not only expensive but also "hard to obtain even one bale." "Our original purchase intention was more than 11,300 tons, but in the end only more than 3,700 tons were transacted, a transaction rate of less than 32.8%," Di Hui lamented.
Lu Xiping, deputy general manager of Henan Xinye Textile Co., Ltd., also said that the company's cotton use is currently very tight. "Since June, the company's cotton inventory has been at a very low level, but state reserve cotton is only released at more than 20,000 tons per day. Enterprises cannot buy more even if they want to, and there are almost no spot resources on the market. To ensure enough cotton is available, the company has exhausted every effort."
A person in charge of Huafu Melange Yarn also said that previously the company would not buy cotton with a Micronaire value lower than C1 level at all, but now the company only hopes to be able to buy cotton.
Behind the "crazy" price of state reserve cotton
Human factors such as small reserve release volumes, traders "cutting in", and entrusted warehouses delaying caused the "difficulty in obtaining cotton"
"If we don't buy, we stop production; if we buy, we go bankrupt." This is how many textile enterprises summed up this round of state reserve cotton auctions. However, what enterprises do not understand is what the reason is for this round of soaring state reserve cotton prices.
Is it tight cotton supply? Domestic cotton supply is quite sufficient.
"The current awkward situation is that there are large cotton reserves, yet textile enterprises have no cotton to use," said Wang Qiang, executive president of Shandong Ruyi Group. "There are more than 10 million tons of reserve cotton piled up in warehouses, and last year also saw a bumper harvest. We have nearly 20 million tons of cotton supply. With such a large cotton supply, enterprises are being forced to stop production. This is truly absurd!"
Is it an explosion in market demand? External demand is sluggish, domestic demand is steady, and there are no signs of a demand surge.
"Enterprises all feel that this cotton price surge is very strange. It's not that we haven't experienced cotton price surges before, but the previous round of increases was supported by orders. This time, however, downstream enterprises' orders were already weak and the market was sluggish, yet raw materials still rose in price for no reason," Di Hui said.
So where exactly did the market anomaly come from?
The scale of state reserve cotton release was lower than expected, creating a mismatch between supply and demand. According to the Announcement on Organising the Rotation-Out Sale of State Reserve Cotton, under normal circumstances the daily listed sales volume of state reserve cotton shall not exceed 50,000 tons. If cotton prices rise significantly and rapidly over a period of time, and the transaction rate of reserve cotton competitive sales exceeds 70% on more than three days in a week, the listed sales volume shall be appropriately increased. Afterwards, the National Development and Reform Commission also made clear that the daily release volume of state reserve cotton must not be less than 30,000 tons. However, since the release began on May 3, with the transaction rate close to 100%, the daily release volume of state reserve cotton was lower than the requirement of 30,000 tons and even lower than the market expectation of 50,000 tons per day.
"Releasing reserves means increasing supply, which will definitely stabilise and even drive down market prices. This is the unanimous judgment of enterprises and also a market law. But the release volume was extremely small, and large amounts of new cotton were also taken by traders, leaving the real economy unable to afford cotton and unable to use cotton," Wang Qiang said.
Some traders took the opportunity to hoard goods and profit by hyping a "cotton shortage." According to statistics from the China Cotton Textile Association, the proportion of state reserve cotton auction transactions by textile enterprises versus trading enterprises fell from 66%:34% to the current 57%:43%, and during this period the proportion transacted by textile enterprises was once less than 50%. Many enterprises reported that large amounts of cotton auctioned by traders were left sitting in warehouses.
"The very existence of state reserve cotton is to guarantee the raw material supply of the manufacturing industry, so why did half of it end up in the hands of traders? Moreover, traders are purchasing on behalf of small and medium-sized cotton enterprises. If small and medium-sized cotton enterprises have no cotton to spin, how could so many traders have auctioned cotton but not taken delivery?" Di Hui reported that when asking warehouses multiple times when the cotton could be withdrawn, the other side always answered, "Your cotton is blocked inside by the traders' goods and cannot come out."
Sun Ying'an also said, "Some traders auction cotton but do not take delivery, reducing the efficiency of cotton withdrawal from warehouses. Cotton prices rise every day, and the purpose is speculation."
Some warehouses also helped fuel this wave of cotton speculation. Enterprises generally reported that after payment in this year's transactions, it took at least about 15 days to get the cotton, and they also had to pay a series of "exorbitant levies and miscellaneous fees" without invoices. "We paid all these messy fees the warehouses demanded, such as stack-turning fees, warehouse-transfer fees, and baling fees. To keep production going, whatever the warehouse said was taken as final, whatever they asked for was given, and even logistics were arbitrarily designated by them at high prices," Sun Ying'an said.
Yu Xiaoxin, director of the First Public Inspection Division of the China Fibre Inspection Bureau, also revealed that at present, apart from the 16 warehouses directly under the state, the remaining 265 involved in cotton reserves are all social entrusted reserve warehouses. These entrusted reserve warehouses have poor conditions and little willingness to release goods because warehousing subsidies are involved. For every extra day cotton stays in the warehouse, the state must pay one more day's fee. "Some warehouses secretly form alliances. If any one of them releases more than three batches in a day, the remaining warehouses will gang up on it. So when releasing goods, these warehouses always find excuses to delay, one moment saying there are no workers, the next saying the vehicle has broken down. At present, the state still has no constraint mechanism for social entrusted reserve warehouses."
Reduce institutional transaction costs
Enterprises suggest promptly increasing the daily release volume of state reserve cotton while restricting non-cotton enterprises from bidding
When Sun Ying'an rushed to Beijing, Xiaomian, a leading enterprise in Hubei's textile industry, had already decided to take more than ten days off. "In fact, workers from a group of suspended enterprises in nearby Huangshi, Honghu, and Jingzhou have all come to Xiaomian. We don't want to stop production either, but there is really no way. Now cotton prices have risen by three to four thousand yuan per ton, while cloth prices have not risen at all. If there is no change in the release of state reserve cotton, we really cannot keep going."
In Henan, Hebei, and Shandong, many textile enterprises are also planning to suspend work and wait for production. "Now it is another test of survival. We are tied to the employment of tens of thousands of people, so we cannot just shut down casually. But in terms of cotton raw materials, restricted by quotas, we cannot freely allocate international resources, and we also have to pay high institutional transaction costs. This makes us lose at the starting point in international competition before the race even begins," admitted Tang Zhangming, chairman of Changshan Textile Group.
In the view of Yang Baofu, deputy general manager of the National Cotton Exchange, 2016 was actually the year with the most complete design of the reserve release system over the years, but in the implementation process it encountered many difficulties that the industry had not anticipated. In fact, industrial capital was blocked by speculative capital, and textile enterprises suffered a huge impact.
Restraining speculation, restoring normal market order, and promptly increasing the release volume of state reserve cotton have become the voices of the textile industry. "Holding back sales and cherishing stocks will inevitably harm the public and enrich oneself. Keeping cotton for one more year is a huge burden on public finances, and increasing the release volume is the win-win option," Sun Ying'an said. The annual cost of national treasury storage per ton of cotton is about 1,400 yuan, which means the national treasury has to pay tens of billions of yuan in costs each year for cotton reserves, and this does not even include downgrading and depreciation. Once the cotton crisis forces enterprises to stop production on a large scale, state reserve cotton will be even harder to handle.
The state should also issue detailed regulatory rules for reserve warehouses and impose corresponding penalties on warehouses that fail to release cotton on time. Enterprises generally reported that currently there are fines if enterprises cannot take delivery within 10 days, but there is no corresponding compensation if reserve warehouses fail to release goods within 10 days. Rights and obligations correspond to each other, and withdrawal efficiency should be borne by both sides.
Restricting non-cotton enterprises from auctioning reserves for a period of time is also a suggestion from many enterprises. "Orders were signed in the fourth quarter of last year, and we cannot breach the contract. Moreover, there are more than 100 small enterprises working alongside us. If we stop production, what will happen to these small enterprises? Can the state, for a period of time, prohibit or restrict non-cotton enterprises from auctioning reserves, thereby squeezing out room for speculation and protecting cotton use by the real economy?" Wu Mingfeng suggested.
To fundamentally solve the "cotton calamity" faced by the textile industry in recent years, it is still necessary to rely on deepening reform. A few days ago, the National Development and Reform Commission and the Ministry of Finance jointly issued a document, extending the reserve release period from the end of August to the end of September, with the total volume able to exceed 2 million tons. Futures prices and auction transactions subsequently declined, and enterprises entered another round of wait-and-see and market panic.
"The current renewed rise in cotton prices is essentially still a conflict between the planned economy model and the market economy model," suggested Sun Ruizhe, vice president of the China National Textile and Apparel Council. The state should increase the daily release volume of cotton sold from reserves, tilt the cotton release system toward production-oriented enterprises, and not stop releasing reserves before new cotton comes to market. In addition, in response to the shortage of high-quality cotton, the issuance of import quotas should be increased. "At present, the textile and apparel industry accounts for about 13% of China's export trade and about 12% in terms of employment, so its importance is obvious. Only by continuing to let the market play a decisive role in resource allocation and reducing institutional transaction costs can we further consolidate the international competitiveness of the textile industry."